Securities are on Ethereum today and virtually nobody is talking about it
Dear Crypto Natives,
Notice anything different about this Bloomberg terminal?
There’s a lot there I know.
You’re looking at a bond that’s been issued to a NASDAQ traded restaurant corp called Fat Brands—a company that franchisees over 400 restaurants.
Pretty normal stuff right?
Wait…what’s that in the bottom right corner? An ETH address? Was this $39.7m corporate bond issued on ETHEREUM?
Couldn’t be. Ethereum is just for geeks.
Here’s the ETH address of FAT Brands LLC the bond issuer.
Here’s the $39.3m of bond cash on ETH (purchase price less principal reserves).
This is legit. OMG Bloomberg terminals using Ethereum for asset settlement!
Interest paid via stablecoin to ETH addresses.
A $40m bond last month and $500m in the pipeline.
Is this the beginning of Wall Street replacing its settlement layer with Ethereum?
And what’s it like to buy one of these bonds?
Ethereum will eat Wall Street's settlement layer
RSA: A few weeks ago I was on the phone with my broker from Fidelity. Somehow, in the midst of moving money between my financial institutions and making trades I had accidentally placed orders with more money than I actually had in my account. A few days prior to speaking to the representative I had received a letter stating that if I didn’t transfer enough funds by the end of the week they would liquidate enough assets to cover the shortfall.
I asked the person on the other end of the line, “How was this possible? Why was I allowed to place a trade when I didn’t have the money?”
She didn’t really have a good answer. Basically, she stated that Fidelity is able to allow people to place a trade without the money as long as they believe that it will be paid by settlement time. Somehow, I had stumbled into a loophole that I came to find out was not that unusual and I was reminded that I don’t really own the assets in my brokerage.
The problem of traditional finance and settlement
The problem of tracking ownership of assets is a difficult one, not just for brokerages. Cap tables are often tracked in spreadsheets and can get fat-fingered. Rehypothecation and short-selling can lead to more shares existing than should. Then there’s the whole story of Dole Food, where shareholders ended up owning about 33% more shares than were supposed to exist. It’s a challenge because there’s no one global representation of the state of ownership at any point in time. But if you’ve been in crypto for any period then you’ve probably heard all of this and know of several companies trying to tackle this problem with a blockchain: t-Zero, Securitize, etc. However, I would wager that you haven’t heard about one company that is already using Ethereum’s mainnet to solve this problem in the niche finance space of securitized business lending: Cadence.
Looking for high yield in a low yield world
Before diving into their solution, I’d like to give you a rundown of how I found Cadence and what their business provided me as an investor.
We’ve obviously been in a low interest environment for at least a decade and the past few weeks indicate that this period will remain for the indefinite future. So, where do investors go to get yield? How do retirees, like my parents, make a reasonable cash flow on a lifetime’s worth of savings? Gone are the days of making 5% on bonds and other low risk lending. Peer-to-peer lending, once seen as a way for retail to tap into bank lending returns, has now been crowded out by the very institutions it was meant to replace. As rates have fallen, investors have had to seek yield in higher risk assets: high yield dividend stock, lower grade bonds, and real estate. Where do you turn when money is cheap and the world is flush with dollars?
One place that I decided to look was in small business financing. For those small businesses that need short-term cash flows to pay suppliers and payroll while their invoices float, they are willing to pay a higher lending rate. These businesses are usually collateralizing their accounts receivables or other assets to get access to short-term financing. And this provides a fairly good risk-to-reward for investors looking to diversify their passive returns. I think of these investments as a way to fill out my risk profile since the returns are uncorrelated to equities and other high yield investments. There are a number of companies out there that allow accredited investors to invest in these assets but they often require a large amount of capital or don’t have a transparent view of their asset flows. Then I stumbled onto Cadence. They made it easy to invest with as little as $500, they were integrated with Bloomberg terminals, their website was intuitive and they offered competitive returns. And then I learned that they use Ethereum mainnet under the hood. Sold! I had to give them a try.
I’ve been investing with Cadence for over 6 months now and have been pleasantly surprised by the performance of my investments and the ease of use. I’ve invested in 11 deals, and the return rates generally range from 9% to 12% APR. The returns have been inline with expectations and I can rollover into new rounds as the old ones mature. The duration of each deal ranges from 1 month to 1 year but is typically 3-6 months. They are sourced by various loan originators that have a specific industry focus—transportation, small to medium sized businesses, Mexican small biz, even crypto lending.